Sureties are labeled “insurers” by the Florida Insurance Code. But there are at least six key differences between payment & performance bond sureties and insurers.
1. A Surety in Florida is Generally Not Susceptible to a Claim of “Bad Faith.”
Sureties are not liable for bad faith in Florida. 2015 marks the ten year anniversary of the Florida legislature excluding payment and performance bond sureties from the bad faith statute. The amendment provides:
A surety issuing a payment or performance bond on the construction or maintenance of a building or roadway project is not an insurer for purposes of [the statutory bad faith remedies].
Claimants are also generally prohibited from maintaining a common law bad faith claim, as Florida law does not recognize a cause of action for first-party bad faith outside of the statutory context. Nirvana Condo v. QBE, 589 F.Supp.2d 1336 (S.D. Fla. 2008).
2. The Surety Receives Indemnity.
Insurers indemnify the insured. Sureties, on the other hand, receive indemnity from the contractor and indemnitors. In other words, if the surety performs or pays bond claims, the indemnitors must reimburse the surety for its losses, including investigation and attorneys’ fees. The obligation of the indemnitors to indemnify the surety arises under the general indemnity agreement (a contract) and under the common law (no contract needed).
3. The Surety Does Not Expect Losses on Payment or Performance Bonds.
Insurers consider losses expected from the insurance pool. That’s one reason actuaries are paid the big bucks.
Sureties do not expect losses. Florida surety bonds are issued only to qualified individuals, after the underwriter performs a careful investigation, background check, future projections, and a thorough analysis of the contractor’s ability to perform its work and pay its obligations. Underwriters look at the 3 C’s: Character, Capital, Capacity.
Character is the history and fortitude of the contractor. It is the most subjective of the underwriter’s assessment.
Capital means the financial strength of the contractor and the indemnitors. Sureties depend on complete and accurate financial information. For bigger projects, sureties get auditors to verify the accuracy of the contractor’s books and records.
Capacity looks at whether the contractor’s cash and work flow, experience, expertise, and equipment are able to take on the prospective construction work.
If the surety does have to perform or pay a bond claim, it expects to be fully indemnified and held harmless by the principal, i.e. the primary obligor (contractor) is expected to reimburse the secondary obligor (surety).
4. The Surety Does Not Protect the Principal.
Insurance protects the insured against a risk. Suretyship protects the obligee. Florida sureties do not protect the principal. Instead, the opposite is true: A principal in Florida protects its surety via contractual and common law indemnity (which is well-established by Florida courts).
5. Principals Pay Less Premium Premiums for Surety Bonds.
Insurance premiums are carefully calculated to handle an expected loss and still make the company a profit. Surety premiums are smaller and designed only to cover the guarantee that the principal fulfills its obligation. Sureties expect principals to fulfill their own obligation. A surety in Florida is only a secondary obligor. As such, payment and performance bond fees are generally substantially lower than an insured would pay for insurance.
6. Suretyship is a Tripartite Contract, Insurance Contracts are Two-Party.
A surety relationship involves three parties: The principal/contractor, the owner/obligee, and the surety. A surety bond is issued by the surety on behalf of the principal. The contract guarantees the principal will complete its obligation to the owner/obligee.
Insurance, on the other hand, is a two-party contract between the insured and insurance company. The policy assumes a guaranteed promise that the insured will be compensated by the insurance company in case of a covered loss.
While an insurance contract protects the party contracting with the insurer, a surety contract does not protect the party buying the bond. To the contrary, a principal must protect its surety, as Florida courts have long recognized under general indemnity agreements and under the common law.
Although Florida surety law may statutorily label sureties “insurers,” for all practical purposes a surety in Florida is not an insurer.